High‐Tech Ipos: A Tale Of Two Continents

The typical price behavior of an initial public offering (IPO), consisting of a price upsurge on the first trading day followed by subpar performance in the (longer‐run) after‐market, is one of the most intriguing puzzles in corporate finance. This study focuses on high‐tech IPOs in Europe and the U.S. over the period 1998–2001, both to compare the European and U.S. IPO markets and to determine how the price behavior of high‐tech IPOs compares to that of IPOs in general. Average initial‐day returns were 39% and 64% for the European and U.S. samples, respectively. The median returns were significantly lower, however, indicating that the sample averages are affected by a small group of exceptionally strong performers. But, for the first full year of trading, the median market‐adjusted returns were negative for both samples. Not surprisingly, this substandard aftermarket performance was most apparent in companies that failed to generate operating profits. As with IPOs in general, high‐tech IPOs showed higher initial‐day returns in “hot” markets than in “cold.” Strong first‐day performance was a good predictor of IPO volume in the high‐tech market, with strong first‐day returns triggering a flood of IPOs in subsequent months. Overall, then, the authors' study concludes that the price behavior of high‐tech IPOs provides an exaggerated version of the general tendency of IPOs to be underpriced initially but underperform over the longer term.